China is the world’s most-populous nation and the second-largest economy with a booming urban middle class and amazing entrepreneurial activity. Often dozens of Chinese stocks are among the top performers at any given time, across an array of sectors.
But with China’s crackdowns on Didi Global (DIDI), for-profit education firms and other sectors, U.S.-listed Chinese stocks have been hammered in recent months, adding to a weak 2021.
Meanwhile, a looming default by Chinese property developer Evergrande roiled global markets in late September. Evergrande has missed multiple payments on dollar-denominated debt. Beijing seems to be trying limit the damage from an Evergreen default vs. preventing it.
Best Chinese Stocks Across Many Industries
As the world’s largest internet market, it’s no surprise to see big growth from China stocks focusing on e-commerce, messaging or mobile gaming. Notable Chinese internet stocks include:
In electric vehicles, several Chinese companies are becoming serious rivals to Tesla (TSLA) in the world’s biggest auto market.
Several Chinese financial firms or brokerages listed in the U.S.
Several China stocks are in solar power.
For-profit education Chinese stocks are a notable non-tech sector.
- New Oriental Education (EDU)
- Tal Education (TAL)
- 17 Education & Technology Group (YQ)
- Gaotu Techedu (GOTU), formerly known as GSX Techedu.
Beijing Crackdown On Chinese Stocks
Investors should be aware of significant risks with investing in Chinese stocks. The authoritarian state and its regulators can impose sweeping restrictions, fines or bans on major companies, often with little notice or transparency.
That risk has been very apparent over the last several months.
Alibaba ran afoul of regulators in late 2020, with regulators opening probes into internet platforms and suspending the Ant Group IPO. In April, China fined Alibaba $2.8 billion for anti-competitive actions and ordered it to change various practices.
Alibaba affiliate Ant Group is limiting the scope of some of its businesses to comply with regulators’ demands.
China’s cybersecurity regulator in August ordered app stores to remove Didi Chuxing, just days after Didi Global (DIDI) held one of the biggest U.S. IPOs in years. The cybersecurity regulator said Didi violated restrictions on the collection and usage of personal information, but didn’t offer any specifics. That came just days after regulators announced a probe and ordered Didi to suspend new user sign-ups.
More broadly, China is imposing cybersecurity reviews on internet and data-centric companies listing overseas. Hong Kong listings appear to be exempt, suggesting far fewer Chinese companies listing in the U.S. going forward. Many big U.S.-listed Chinese companies already have secondary listings in Hong Kong.
For-profit school operators, including New Oriental Education (EDU), TAL Education (TAL) and Gaotu Education (GOTU), crashed on July 23 as Beijing mulled whether to make after-schooling tutoring firms nonprofit. These stocks had already fallen sharply in 2021 as regulators and leaders signaled new restrictions.
Beijing later confirmed for-profit restrictions, triggering continued huge losses in Chinese school stocks and big losses among U.S.-listed China stocks. China also is setting new rules on app-based delivery firms and has signaled it may target the property sector. Finally, Beijing has hinted at even tougher rules for Hong Kong and Macau.
Five-Year Plan Calls For More Regulation
The Communist Party’s Central Committee on Aug. 10 issued a new five-year plan that calls for greater regulation across a broad scope of businesses and the economy, triggering fresh losses on Chinese stocks.
On Aug. 17, the Ministry of Industry and Information Technology issued a set of draft rules governing competition among online platform operators.
Tencent and for-profit educators stressed regulatory impacts on future growth in recent days.
On Friday, Aug. 20, China approved a new data-privacy law, raising concerns of further crackdowns on internet firms and companies that rely heavily on consumer data.
On Friday, Aug. 27, China issued draft guidelines on regulating the algorithms used by internet firms to make recommendations to users, with the stated goal of protecting users’ privacy and data security. China also announced a suspension of thousands of Weibo accounts after two celebrity fan bases feuded. China is banning online lists ranking celebrities by popularity, affecting Weibo and several other internet sites.
Also, China is drafting rules that would ban data-heavy Chinese firms from going public in the U.S., the Wall Street Journal reported Aug. 27, citing sources.
By Aug. 30, China limited minors to playing video games three hours a week. NetEase (NTES) and Bilibili (BILI) sold off, with Tencent (TCEHY) also in focus. Back on Aug. 3, Chinese state media criticized online gaming as “spiritual opium” for adolescents, sending Tencent stock, NetEase and Bilibili sharply lower.
On Sept. 8, China regulators called in NetEase and Tencent to remind them to comply with new rules. The South China Morning Post reported Sept. 9 that China will halt approval for new online games.
China regulators are pushing to break up Ant’s Alipay, with the lending business moving to a separate app. That’s according to reports on Sept. 13.
Also, China regulators want the EV market to consolidate. It’s not clear if that will help or hurt some of the larger players, including BYD, Li Auto, Xpeng and Nio.
China is gearing up stricter oversight of Macau casinos, with gaming license extensions possibly at risk.
On Oct. 8, China’s market regulator imposed a $533 million fine on food-delivery giant Meituan for anti-competitive behavior, ending a months-long probe. But that was below reports in early August that Meituan could face a fine of nearly $1 billion.
Chinese Stock Risks, Continued
Accounting fraud, while less likely with institutional-quality names such as Alibaba, remains a concern. Luckin Coffee admitted to widespread fraud in 2020. Fraud charges alone can trigger massive share price losses.
Meanwhile, a new U.S. law could force Chinese companies to delist from U.S. markets. That threat isn’t imminent, and could be averted with negotiations between the Treasury Department and Beijing over accounting oversight. Still, it’s something that could loom large for China stocks in the coming years.
SEC Chairman Gary Gensler on Aug. 16 gave direct warnings about investing in Chinese stocks, saying many U.S. investors don’t know enough about the companies. Last month, Gensler told staff to seek specific disclosures from Chinese companies before giving approval to U.S. IPOs.
China Stock Investing Via ETFs
One way to minimize individual China stock risks is via ETFs. Another advantage of buying ETFs is that a growing number of Chinese companies are listing in Hong Kong or Shanghai, instead of or in addition to the U.S.
KraneShares CSI China Internet ETF (KWEB) tracks major Chinese internet companies. Many Chinese stock holdings in the KWEB ETF are U.S.-listed or traded, such as Alibaba stock, JD.com, Tencent, Pinduoduo and Bilibili, but KWEB also holds companies listed on Chinese markets. Direxion Daily FTSE China Bull (YINN) is a three-times levered ETF of the 50 largest companies listed in Hong Kong, including Alibaba, JD.com and Tencent stock, but its biggest weights are in financials. (The Direxion Daily FTSE China Bear (YANN) is a three-times levered ETF shorting Hong Kong’s biggest companies.)
Stock Market Trend Key
As always, investors should be following the overall stock market trend, adding exposure in confirmed uptrends and paring exposure or going fully to cash in corrections or bear markets. Right now the stock market is in a confirmed uptrend, though there have been some weakening trends.
Best China Stocks To Buy: Key Ingredients
Focus on the best stocks to buy and watch, not just any Chinese companies.
IBD’s CAN SLIM Investing System has a proven track record of significantly outperforming the S&P 500. Outdoing this industry benchmark is key to generating exceptional returns over the long term.
Look for companies that have new, game-changing products and services. Invest in stocks with recent quarterly and annual earnings growth of at least 25%.
Start with those with strong earnings growth, such as Alibaba or Pinduoduo stock. If they’re not profitable, at least look for rapid revenue growth as with Nio stock. The best China stocks should have strong technicals, including superior price performance over time. But we’ll be highlighting stocks that are near proper buy points from bullish bases or rebounds from key levels.
Chinese stocks are out of favor. Whether it’s a general malaise for EV names such as Nio and Xpeng, or a regulatory crackdown for Alibaba, Didi or New Oriental Education, U.S.-listed Chinese stocks have been notable losers in 2021.
After a brief attempt in May and June, China stocks are under heavy pressure once again.
Chinese stocks rebounded on July 28 after state media blamed the recent sell-off on “venting of emotion.” That suggested leaders would like stock prices to stabilize.
But Chinese crackdowns and harsh rhetoric have continued, while economic data and new Covid outbreaks in China also have raised concerns.
In late August, China stocks rebounded, amid a lack of fresh government initiatives and earnings reports from JD.com and Pinduoduo. China stocks continued to rally in early September, but that faded with fresh crackdown fears and concerns about property markets.
In early October, Chinese stocks rebounded, but it’s unclear how meaningful the advance is for now.
Best Chinese Stocks To Buy Or Watch
|Company||Ticker||Industry Group||Composite Rating|
|Li Auto||LI||Auto Manufacturers||52|
So let’s analyze these five top China stocks: Li Auto stock, Nio stock, BYD stock, Sohu stock and Weibo stock.
Li Auto Stock
Li Auto is one of several Chinese electric vehicle makers that trade in the U.S., competing with each other and Tesla (TSLA).
While still losing money, Li Auto has seen huge sales growth from its one current model, the Li One SUV. Li One is actually a hybrid, with a small gasoline engine to extend its range.
The automaker reported an adjusted Q2 loss of 1 cent a share, slightly better than expected. Revenue soared 159% to $780.4 million, easily beating. Q3 revenue guidance also was strong.
But on Sept. 20, Li Auto said it expected to deliver 24,500 vehicles in Q3, vs. its prior forecast of 25,000-26,000 vehicles. The company cited chip shortages.
Li Auto on Oct. 1 reported September deliveries of 7,094 Li One SUVs, up 102.5% vs. a year earlier. But that’s down from July and August. Still, Q3 deliveries totaled 25,116.
On Sept. 1, Li Auto (LI) reported 9,433 Li One deliveries. That’s 248% above a year earlier and up 9.8% from 8,589 in July.
After a huge run from its July 2020 IPO to a record 47.70 on Nov. 24, 2020, Li Auto stock plunged to 15.98 in May. Shares more than doubled to 36.66 on July 1, but have since pulled back, like other EV stocks and highly valued growth names generally.
Shares have formed a bottoming base within that larger consolidation.
After hitting multimonth lows, Li Auto has rebounded, gapping above its 200-day line on Oct. 7 and is now near its 50-day line.
Li Auto debuted on the Hong Kong exchange on Aug. 12, joining Xpeng in having a dual listing.
It also plans to introduce a new, larger hybrid SUV in 2022.
Li stock has a 52 IBD Composite Rating out of 99.
While not as large as the diversified, profitable BYD, Nio is the most established of the Chinese EV startups. Nio has three electric vehicles, the ES8, the ES6 and the crossover EC6. It plans to release a high-end EV sedan, the ET7, in 2022.
The company is not yet profitable, but revenue growth is very strong. Revenue soared 529% in Q1 2021 vs. a year earlier, when China was at the height of its coronavirus crisis. However, Nio deliveries stalled in Q2 vs. Q1 amid chip shortages.
Nio has begun Norway deliveries for its ES8 SUV, kicking off a European expansion.
Nio regained its title as the highest-producing China EV startup, at least for September. On Oct. 1, Nio reported monthly deliveries of 10,628, up 126% vs. a year earlier. That included 5,260 ES6 SUVs, 3,390 EC6 crossovers and 1,978 ES8 large SUVs.
That’s up from just 5,880 deliveries in August and 7,931 in July. Nio claimed record new orders but cited supply-chain issues, almost certainly including chips, as hampering production.
After its August delivery figures, Nio cut its Q3 target to 22,500-23,500 from 23,000-25,000. But it ultimately delivered 24,439 EVs.
Nio stock peaked at 66.99 on Jan. 11, tumbling to 30.73 on May 13. Shares ran up to 55.13 on July 13 but soon retreated to multimonth lows. Shares are starting to move toward their 50-day line.
Nio is moving toward a dual listing, like Xpeng and now Li Auto.
BYD Co. is the biggest pure-play Chinese EV maker, making electric cars and buses, as well as many hybrids. It’s also a major EV battery maker. Warren Buffett’s Berkshire Hathaway (BRKB) is a longtime investor.
BYD reported first-half profit fell 29% to 1.17 billion yuan ($180 million), due to increasing materials costs, according to a Friday night filing. Revenue leapt 54% to 89.1 billion yuan ($13.77 billion).
BYD sold 54,841 all-electric cars in Q2, not far below Tesla’s 61,745. The China EV maker sold 99,828 new energy vehicles, which also include hybrids and commercial vehicles.
In July, BYD sold 50,492 new energy vehicles, up 171% vs. a year earlier. EV sales totaled 24,996, up 109%. In August, BYD sold 61,409 new energy vehicles, up 288% vs. a year earlier. EV sales leapt 223% to 30,382.
On Oct. 3, BYD reported that it sold 71,099 new energy vehicles in September, up 258% vs. a year earlier. EV sales totaled 36,238, up 140%. For the third quarter, NEV sales hit 183,000, while EV-only sales totaled 91,616.
Like Nio and Xpeng, BYD has begun selling EVs in Norway, starting with the Tang SUV.
Notably, BYD is profitable, in sharp contrast to Li Auto, Nio and Xpeng Motors.
BYD stock corrected nearly 52% from its January peak of 35.94 to its May 12 low of 17.41, though that’s a smaller decline than Li Auto stock.
BYD stock surged above a handle buy in late July, nearly hitting a record high before pulling back.
Shares have now formed a base with a 36.01 buy point. BYD stock fell back to its 50-day line on Sept. 16, then sharply below the 50-day on Sept. 20. Since then shares consolidated below the rising 50-day line, until clearing that level on Oct. 13.
BYD is listed in Hong Kong and trades over the counter in the U.S. So the BYDDF stock chart is prone to lots of little gaps up and down.
The Chinese mobile gaming firm was one of the early Chinese internet firms on U.S. markets, going public in July 2000. Sohu stock peaked in 2011 and steady fell until March 2020, when it rallied significantly for several months. Shares have been consolidating for about a year. On July 13, Sohu stock spiked higher, clearing an early entry or base-within-a-base and nearly hitting a 52-week high.
Shares soon pulled back, tumbling last week with other U.S.-listed Chinese stocks.
After losing money for several years, Sohu is profitable once again, with revenue growth picking up. On Aug. 9, Sohu reported a better-than-expected per-share profit with revenue up 27.5% to $204 million.
Shares jumped on earnings, but fell back. Sohu stock surged 13% last week to 22.90.
Sohu now has a cup-with-handle base with a 24.60 entry. Shares fell below their 50-day line on Sept. 16. Sohu briefly reclaimed that level. But on Sept. 24, another move above the 50-day line ended with a nasty downside reversal. Sohu stock reclaimed that key level on Oct. 8.
Weibo stock is a popular social media firm, often compared to Twitter (TWTR).
After a tough 2020 due to the pandemic, growth is roaring back. Weibo earnings rose 90% in the latest quarter with revenue up 42%, both accelerating for the past two quarters.
On July 7, shares briefly cleared a 63.65 cup-base buy point but closed below that key level. Weibo had gapped up on reports that it’s mulling a go-private move. The company has denied the go-private report, however.
Weibo shares retreated in August, plunging below its 50-day line and then its 200-day line as China laid out new internet platform rules.
Weibo earnings topped Q2 views early on Aug. 18, with revenue growth accelerating. The company also guided slightly higher on Q3 revenue.
WB stock has a new consolidation with a 64.80 buy point, next to the cup base.
Shares plunged on Aug. 27 as China cracked down on online celebrity culture and suspended many Weibo accounts. WB stock rebounded for a time, but hit resistance at the 50-day line fell back below its 200-day. Weibo is working toward possible moving averages.
Please follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.
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